REITs, O And TLT

Jul. 03, 2015 3:13 PM ETO, TLT, VNQ4 Comments
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Value, Growth At A Reasonable Price, Long-Term Horizon, Portfolio Strategy

Contributor Since 2012

Zugzwang (German for "compulsion to move") is a situation found in chess wherein one player is put at a disadvantage because they must make a move when they would prefer to pass and not to move. The fact that the player is compelled to move means that his position will become significantly weaker. A player is said to be "in zugzwang" when any possible move will worsen his position.

I've been looking at the price correlation between REITs (VNQ) (O) and 20yr treasuries (TLT). Although short term rates remain close to zero due to FED policy, long term rates are moving up. I'm not sure there's a perfect correlation, but - at least in the short term - it does look like prices are moving in tandem.

(Source: YCharts)

I'm working under the assumption that - barring a catastrophic event - long term yield on the TLT will continue moving UP. Therefore, I'm not ready to buy REIT's at this particular time. If rates reach the 4.00% level (2011), and with a 2.50% premium over Realty Income , we'd be looking at a share price of $35. That's a lot of "if" and "when", but in my opinion it's just not worth the interest risk right now.

(Source: YCharts)

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